August 3, 2010
Peter - well said!
You set this up nicely in the first sentence by differnetiating "standard of care" (rules or
proscriptive retrospective codified best practices (RFP fairness) vs. "standard of
disclosure (prescriptive standards relative to transparency).
August 3, 2010
We respectfully suggest that the issue here is not the standard of care but the standard of
disclosure to retail customers as to what financial services they are receiving. The
Commission has tried to solve this issue in the past only to be rebuffed by the courts but
it now has full authority to do so in a simple way. Customers need to understand whether
they are purchasing executions or advice. They need to understand whether its a one
night stand or a relationship. They do not understand that now. We believe that three
simple principles could clarify and solve the problem. The commission should:
1) make very clear that unsolicited transactions especially internet trades are not subject
to either suitability of fiduciary duty.
2) insist that using the word adviser /advisor requires a fiduciary duty
3) insist that customers acknowledge that a trade is unsolicited and that they are not
getting financial advice for a special fee or else the fiduciary duty requirement applies
and the seller must register as an investment adviser. Additional disclosures that might be
useful would include "we don't pay you for margin account stock loans and we may
facilitate short sales in stocks we heavily recommend." Those actions should also raise
serious questions under the fiduciary standard for advisers affiliated with brokers..
Retail customers today especially those facing near term retirement have the most
discretionary wealth for investment. But their decisions are also the most consequential
as they face a significant shortfall in retirement and complex healthcare decisions along
with declining or stagnant real estate investments. Issues like reverse mortgages and
annuities are more complex then the financial decisions of their parents. This may
suggest that the rules in this regard be different for individuals over 50 years of age.
But most importantly the Commission should try to simplify the message that customers
receive when they engage a broker or adviser. We think most customers want a
relationship but may not want to pay for it, just as most psychiatric patients need therapy
but drugs are cheaper and less time consuming for the therapist. Brokerage execution is
cheaper than brokerage advice but too many customers do not understand the difference
and too many brokers do not explain it. Our point is that these customers and brokers do
not care about the standard but instead the service. The customer may need broker time
and the broker needs executions. Of course many large brokers are shipping the less than
$100,000 asset customers to call centers where these explanations are surely more
We believe that most members of the financial services industry are honorable but are
also stretched by certain regulatory policies intended to reduce costs but which must of
necessity reduce services. See the Grant Thornton study in this area.
www.GrantThornton.com/IPO <http://www.GrantThornton.com/IPO>. In this regard we
do not believe there are many suitability or fiduciary cases out there but the Commission
should disclose them in this rulemaking. A comparison of these cases to the recently
announced subprime crisis settlements against big firms would be instructive. The
number of cases in relation to the reduction in execution costs/broker profits is a subject
especially worthy of study and especially sensitive to small bd's and advisers. The
time honored phrase comes to mind;" you get what you pay for". Customers must
therefore understand that if you want an adviser to study your entire financial situation
including your nursing home future you must pay for it.
Having said this we also note that discretionary accounts at brokers should not be subject
to adviser registration for the same reason-customers paying only commissions are not
paying for advice and this service should be available as long as its adequately disclosed.
Some customers like this concept and they should be allowed to use it as long as they are
told that the only thing the broker does is to manage a certain amount of money and not
do the financial analysis done by an IA..We suspect that the staff will learn nothing new
with this study but that intense pressure will be applied to avoid the disclosures listed
above. One alternative way to view this problem is to allow the customer to choose where
he wants to be with enforced disclosure. Today its too often the broker who forces the
customer into the bd regime when the customer may want to be in the IA regime and may
think he is. The goal of the study and the rulemaking should be that every customer
makes a conscious choice of who his financial doctor will be.
Finally the Commission must not overlook the pricing pressures it has imposed on small
bd's and advisers while asking them to adopt a fiduciary standard. Cheap executions and
intense regulation do not equal comprehensive financial counseling. It reminds of the
famous Viet Nam phrase -"we had to destroy the village in order to save it." This issue is
rarely if ever addressed in discussions about the appropriate standard. Competition is
necessary unless we want all middle class investors directed toward a call center. The
Commission should therefore be prudent in imposing standards on small brokers and
advisers fighting to survive and consider the need for a vibrant small firm financial
services community. See the intense debate for the small member seats on Finra's board
of governors. http://www.investmentnews.com/article/20100730/FREE/100739987/-
Investment News has also reported extensively on the declining number of small brokers.
http://www.investmentnews.com/article/20100627/REG/306279981. Small brokers and
advisers are vital to the serious financial advice needed by those facing retirement.They
should not be disadvantaged by a blanket desire to make everyone a fiduciary.If a
customer wants a fiduciary he has to pay for that service and understand the difference.
Plexus Consulting LLC